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This webcast contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global
network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this
communication, rendering professional advice or services. Before making any decision or taking any action that may
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© 2023. For information, contact Deloitte China. Deloitte IFRS Insurance Webcast – April 2023
Guaranteed insurability: where is its “boundary”?
Francesco Nagari, Deloitte Global IFRS Insurance Leader | April 2023
Presenters

Francesco Nagari Liza Gonzalo

Deloitte Global IFRS Insurance IFRS 17 Director
Leader
frnagari@deloitte.com.hk ligonzalo@deloitte.com.hk

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Agenda
• Overview

• Illustrative example

• Practical considerations

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Guaranteed insurability: where is its “boundary”?
Overview

• The contract boundary is a key parameter in the measurement of a group of insurance contracts. It must
be analyzed at individual contract level. IFRS 17 has principles around the contract boundary conclusion
that sometimes call for critical judgments to be made.
• Complex situations exist when there is an interplay of substantive rights and obligations in a contract. In
this webcast we cover when the determination of the contract boundary is not straight-forward.
• We will cover the topic of determining at what point in time an entity would set the contract boundary
under the requirements of IFRS 17:34(b) and its two criteria.
• The typical scenario is where insurers offer guaranteed insurability to their policyholders on a recurring
basis but reserve the right to reprice the risk of the entire portfolio in which those policyholders have
been placed when they purchased their first insurance contract with the entity.
• Both of the IFRS 17:34(b) criteria should be met for the contract to be bounded at the next reassessment
date.
• Criterion 1 – the insurer has the ability to fully reprice at the portfolio level; and
• Criterion 2 – the pricing of the contract does not take into account risks that relate to the periods
after the reassessment date.

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Guaranteed insurability: where is its “boundary”?
The second criterion of IFRS 17:34(b) – judging an insurer’s pricing practice
• It is universally accepted that the first criterion in IFRS 17:34(b) requires much less judgment
than the second one.
• Concluding whether or not the insurer’s pricing takes into account risks beyond the next
reassessment date is not straightforward. Below are a few examples when IFRS 17:34(b)(ii) may
not be met and the boundary of the contract goes beyond the repricing date

Premiums charged in earlier periods subsidise premiums charged in later periods, e.g. level premiums

Guaranteed insurability for renewal periods with cross-subsidisation among age groups in the portfolio

Premiums are set in anticipation of future renewals beyond the next reassessment date

Paying premium is not for the full duration of the contract

Premium discounts and no-claim bonuses apply and they are specified upfront

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Illustrative example
Simplified fact pattern
Entity A sells yearly renewable health insurance
contracts with the following terms:
• offered to policyholders between the age of 20
to 30 years;
• guaranteed cover for another year when the
policyholder pays the annual premium, i.e. no
new medical underwriting is required for the
existing policyholder after purchasing the first
insurance contract in this line of business;
• cannot be renewed once the policyholder
reaches the age of 31.
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Entity A has an unconstrained practical ability to
reprice the risks at the portfolio level.
When they purchase the first insurance contract,
the policyholders in the portfolio are classified and
grouped together based on different health factors
(e.g. separating smokers and non-smokers) and
each group within the portfolio has its own premium
rate. These factors cannot be reassessed at any
subsequent renewal date.
The policyholder has the right to renew the contract
at the new price quoted annually or to reject the
renewal option and lose its guaranteed insurability.
The policyholder can also lapse the contract at any
time during the annual cover period.
Deloitte IFRS Insurance Webcast – April 2023
Illustrative example
Simplified fact pattern

Entity A issues two types of contracts:

Accounting issue:
Contract Type 1: flat portfolio premium
rate – a single premium amount is charged Is the next reassessment date the contract
yearly to all age groups boundary?

Contract Type 2: stepped portfolio

premium rate – premium rates applied IFRS 17:34(b) criteria
for each age group are different across the pricing of the premiums
the age groups in the portfolio and they up to the date of
practical ability to
+
increase as the age of the group reassessment does not
fully reprice risks at take into account the risks
increases (i.e. younger policyholders pay portfolio level that relate to periods after
less than older policyholders, all other the reassessment date
things being the same)
√ ?

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Illustrative example
Simplified fact pattern
Contract type 1

Flat premium rate table

A flat rate of CU100 is Expected cash
applied to all age groups outflows for a given
Age Annual premium for
age of policyholder
group each age group
for the 12-month
policy period
20 30 100
21 32 100
22 34 100
23 36 100
24 40 100
25 44 100
26 52 100
27 65 100
28 76 100
29 97 100
30 120 100

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Illustrative example
Contract boundary assessment – flat premium rate for all age groups
Contract type 1

Policyholders with different

Entity A has the practical ability to reprice the portfolio freely risk levels pay same premiums
every twelve months. However, when pricing the portfolio:

Future morbidity trend beyond 12 months is considered

to set the annual premium for each age group

Existing policyholders gain insurability of their morbidity

risk at a blended portfolio rate that is independent of
their individual health circumstances at renewal date.

Assessment result:
IFRS 17:34(b)(ii) criterion is not met. The next reassessment date is not the contract boundary

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Illustrative example
Fact pattern – step-rated premium
Contract type 2

Premium table
A flat rate is applied for
each age group Expected cash
outflows for a given
Age Annual premium for
age of policyholder
group each age group
for the 12-month
policy period
20 30 86
21 32 90
22 34 95
23 36 100
24 40 100
25 44 110
26 52 110
27 65 135
28 76 140
29 97 150
30 120 155

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Illustrative example
Contract boundary assessment – stepped portfolio rate of premium
Contract type 2

Entity A has the practical ability to reprice the portfolio freely Premiums are proportionately
lower compared to risk in the
every twelve months. However, when pricing the contract: later periods
Future morbidity trend beyond 12 months is considered in 1.84 : 1
[Premium-outflow ratio]
setting the premium.

A stepped rate pricing reduces the cross-subsidy compared 2.87 : 1

with contract type 1. A critical judgment is to assess [Premium-outflow ratio]

whether or not IFRS 17:34(b)(ii) has been met or not.

We want to illustrate an example where the conclusion is

negative.

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 Illustrative example
Analysis of presence of cross-subsidisation as a test on the insurer pricing practice
The graph below shows the analysis of the cross-subsidisation for contract type 2, taking the
25-year-old age group as the modal group to construct a simple cross-subsidisation index to help the analysis
Sample calculation for Age Group 20 (Contract 2):
Assessment result:
𝐴𝑔𝑒 𝐺𝑟𝑜𝑢𝑝 20 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠:
𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠:86 The contract boundary is beyond the next reassessment
𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠:30
> 100% 115% = 𝑃𝑟𝑒𝑚𝑖𝑢𝑚𝑠:110 date because:
𝐴𝑔𝑒 𝐺𝑟𝑜𝑢𝑝 25 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠:
𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠:44
means • the pricing approach considers the risks beyond the
premiums
are charged
next reassessment date; and
relatively < 100% • that is proven by material cross-subsidisation.
higher means
premiums Index when no cross-
Age group Contract type 2 index
are charged subsidisation exists
relatively 20 115% 100%
lower 21 113% 100%
22 112% 100%
23 111% 100%
24 100% 100%
25 100% 100%
26 85% 100%
27 83% 100%
28 74% 100%
29 62% 100%
30 52% 100%

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Practical considerations
Some practical considerations when implementing the requirements of IFRS 17 relating to this topic:
• The assessment of the contract boundary depends on individual facts and circumstances of each contract. All
substantive rights and substantive obligations in a contract must be taken into account when performing the
assessment.
• The presence of an annual renewal pricing mechanism at portfolio level (criterion IFRS 17:34(b)(i)) does not result in
a contract boundary at the next renewal date. Judgment is required when determining whether or not the pricing
does not take into account risks relating to periods beyond the next renewal date (criterion IFRS 17:34(b)(ii)).
• Insurers may need to analyse their past, present and future pricing philosophy to judge whether or not pricing is
conducive to meet or fail criterion IFRS 17:34(b)(ii). Insurers should gather and regularly maintain documentary
evidence such as the pricing policy that guides the pricing team’s consideration of what future risk is and how it is
reflected in the pricing and repricing.

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Practical considerations (cont.)
Some practical considerations when implementing the requirements of IFRS 17 relating to this topic:
• IFRS 17:B64 requires to reassess the contract boundary at each reporting date. Hypothetically, a material change in
pricing philosophy could trigger a different outcome on meeting (or not) criterion IFRS 17:34(b)(ii). This could have
material implications on the financial statements of an insurer.
• Financial reporting governance should include discussion with pricing executives to ensure any changes in the pricing
philosophy are implemented appropriately in the IFRS financial statements. Documentation may need upgrade to
make it easier to validate IFRS 17 requirements (e.g. through the regular calculation of a cross-subsidisation index by
portfolio)
• Deloitte noted that several risk-based capital regulations around the world have borrowed the contract boundary
concept from IFRS 17 to introduce or change the valuation of insurance liabilities for insurance solvency capital
purposes. Insurers need to consider all similarities and differences between IFRS 17 and other regulations that may
borrow the contract boundary concept to ensure internal consistency and to capture material operational
efficiencies in the calculations of the fulfilment cash flows

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Contact details

Francesco Nagari
Deloitte Global IFRS Insurance Leader
+852 2852 1977 or frnagari@deloitte.com.hk

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organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should
consult a qualified professional adviser.
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entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its
member firms, and their related entities, are legally separate and independent entities.
© 2023. For information, contact Deloitte China.